Two Views on the (2019) US Regulatory Climate

On the one hand we have the Winklevoss twins promoting their business on the basis that it is US regulated and that the ‘Revolution Needs Rules’. On the other we have a legal battle commencing between the US SEC and Kik Interactive Inc. and the Kin Ecosystem Foundation (Kik) (which by the way, is a very good crypto project out of Canada).

The Winklevoss argument is that in the long term only regulated crypto businesses will survive and that this is good for institutional and mainstream adoption. They aim to be the ‘fastest turtle in the race’. This approach essentially seeks to capture the value of Bitcoin inspired technology within a controlled environment by rebuilding the existing Wall Street walls around Bitcoin and Crypto. See this article by Samantha Radocchia for further analysis on the Winklevoss approach.

Quite often I read or hear professionals referring the regulators with some sense of reverence or awe, even holding them on pedestals and rushing off to ask for their opinion or even for their help. I have never taken this view and in over 30 years experience of dealing with regulators of many different varieties in many different jurisdictions, I have found that that they have no interest in pragmatism, or in helping those they are regulating, or in helping the wider economy. They typically have an inflated sense of their self worth in terms of the service they provide to society and they approach most issues with an attitude of self-righteousness, dogmatism and belligerence.

So now you know my opinion of regulators, you will not be surprised to find that I thoroughly enjoyed reading the Kik response to the US SEC’s letter of intention to bring charges. The full response is set out here, but in brief it takes apart the SEC’s whole approach to their effort to regulate this new technology in general and specifically as it is related to Kik. The conclusion is set out below.

‘As discussed above, prospective claims against Kik and the Foundation involve no fraud, but instead unjustifiably target a Company that made substantial efforts in good faith to comply with all existing laws and regulations when selling Kin in September 2017. Most importantly, however, the Commission will not and cannot demonstrate that Kin in and of itself or any specific sale or distribution of Kin fall within the purview of the federal securities laws. Not only do claims that the TDE constitute an “investment contract” lack merit, but any contention that the Commission has jurisdiction over subsequent Kin distributions to developers and users is similarly baseless. Indeed, Kin is becoming more adopted, transacted, and used every day; and come trial, Kin may be the most widely used cryptocurrency in the world, creating an insurmountable obstacle to the Commission in proving its case.

But even if the Commission disagrees with Kik and the Kin Foundation regarding the central legal issues, it should nonetheless exercise prosecutorial discretion because any enforcement action is tantamount to improperly regulating by enforcement in an industry desperately needing affirmative guidance regarding the applicability of the federal securities laws. Any enforcement action will similarly harm the very people the Commission seeks to protect: Kin purchasers. However, should the Commission choose to file an enforcement action, Kik and the Kin Foundation are prepared to litigate and are confident that they will prevail in court.’ (my emphasis)

Looking forward to the next steps by the SEC.

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